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EU wants big depositors to be first supporters of failing lenders

EU wants big depositors to be first supporters of failing lenders
The European Parliament has put forward a new mechanism to deal with bank failures in which major depositors in collapsing banks are tapped first in an effort to support the lender.

Deposits below 100,000 euro ($137,700) will be exempt from any losses, and bigger deposits from individuals and small businesses will receive preferential treatment, says Reuters.

The proposal was made following a 16-hour marathon negotiating session in Brussels. The authorities intend to start the mechanism on January 1, 2016, two years earlier than expected. It now goes to EU ministers for approval next week.

The measures show a toughening of economic policy within the EU, along the lines of the efforts to support the failed Cyprus banking system earlier in 2013. The solution of that bank crisis was at the expense of depositors, which ran counter to the dogma that they shouldn't suffer from bank failures.

If the law is accepted, financial losses for shareholders and depositors will become the uniform answer to bank collapses within the European Union. The law will also become a significant milestone in the course of reforming the banking sector, which was one of the reasons for the economic crisis.

Michel Barnier, the European commissioner responsible for creating the reform, declared that it is a "big step" to providing that "taxpayers are no longer in the front line to pay for banks' mistakes".

Once approved the rules will apply to the liquidation of banks in any of the 28 EU member states.

This will go some way to speed up the creation of a banking union within the eurozone, which includes 17 European Union member states.

Legislators are concerned the new rules may rattle depositors, who will rush to transfer savings elsewhere.

Sharon Bowles, the Member of the European Parliament , who took part in the negotiations, rejected the possibility, "It’s not as mind-blowing as it was when it was first dreamed up", “and everyone knows it has been coming.” However many experts are worried that some depositors could be frightened by the new rules.

Banks of the 17 eurozone member states have unsecured bonds worth 860 billion euro, with 200 billion euro belonging to German banks.